exv10w40



 





Exhibit 10.40




Class I




SEVERANCE AGREEMENT




            THIS AGREEMENT (the “Agreement”), made and entered into effective as of
July 14, 2003 (the “Effective Date”), is by and between Cyberonics, Inc., a
Delaware corporation (the “Company”), and George E. Parker (the “Employee”).



            WHEREAS, Employee is a key employee of the Company; and



            WHEREAS, the Company recognizes that the possibility of a Change of
Control (as defined below) of the Company is unsettling and may result in the
departure of key employees to the detriment of the Company and its
stockholders; and



            WHEREAS, the Board of Directors of the Company (the “Board”) has
authorized this Agreement and certain similar agreements in order to retain key
employees to ensure the continuity of its management;



            THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee agree as
follows:



     1.      Term. This Agreement shall commence on the Effective Date and shall
continue until April 30, 2004; provided, however, that commencing on April 30,
2004 and on each April 30th thereafter, the Term of this Agreement shall
automatically be extended for one additional year, unless at least six months
prior to such April 30 date the Board shall give written notice to Employee
that the Term of this Agreement shall cease to be so extended; provided
further, however, that if a Change of Control shall occur during the Term, the
Term shall automatically continue in effect for a period of not less than one
year from the date of such Change of Control. Notwithstanding the foregoing,
except as provided in Section 3, this Agreement shall automatically terminate
on Employee’s termination of employment; provided, however, termination of this
Agreement shall not alter or impair any rights of Employee arising hereunder on
or prior to such termination.



     2.      Change of Control. For purposes of this Agreement, a Change of Control
of the Company shall mean:



                 (i) the acquisition by any “person,” as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), other than the Company, a subsidiary of the Company or a
Company employee benefit plan, of “beneficial ownership” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the Company’s
then outstanding securities entitled to vote generally in the election of
directors; or



 









 





                 (ii) the consummation of a reorganization, merger, consolidation or other
form of corporate transaction or series of transactions, in each case, with
respect to which persons who were the shareholders of the Company immediately
prior to such reorganization, merger or consolidation or other transaction do
not, immediately thereafter, own more than 50% of the combined voting power
entitled to vote generally in the election of directors of the reorganized,
merged or consolidated company’s then outstanding voting securities in
substantially the same proportions as their ownership immediately prior to such
event; or



                 (iii) the sale or disposition by the Company of all or substantially all
the Company’s assets; or



                 (iv) a change in the composition of the Board, as a result of which fewer
than a majority of the directors are Incumbent Directors. “Incumbent
Directors” shall mean directors who either (A) are directors of the Company as
of October 2, 2000, or (B) are elected, or nominated for election, thereafter
to the Board with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination, but “Incumbent Director”
shall not include an individual whose election or nomination is in connection
with (i) an actual or threatened election contest (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or an actual
or threatened solicitation of proxies or consents by or on behalf of a person
other than the Board or (ii) a plan or agreement to replace a majority of the
then Incumbent Directors; or



                 (v) the approval by the Board or the stockholders of the Company of a
complete or substantially complete liquidation or dissolution of the Company.



     3.      Termination on or Following a Change of Control. If a Change of
Control occurs during the Term, Employee shall be entitled to the benefits
provided in Section 4 hereof if, during the Protected Period (as hereinafter
defined), Employee becomes disabled or Employee’s employment is terminated,
unless such termination is (a) due to Employee’s death, (b) by the Company
either for Cause or Employee’s Disability, or (c) by Employee for other than a
Good Reason. Anything in this Agreement to the contrary notwithstanding, if
Employee’s employment with the Company is terminated during the Term and prior
to the date on which a Change of Control occurs, and it is reasonably
demonstrated that such termination (i) was at the request of a third party who
has taken steps reasonably calculated to effect the Change of Control, or (ii)
otherwise arose in connection with or anticipation of the Change of Control,
then for all purposes of this Agreement the Change of Control shall be deemed
to have occurred on the date immediately prior to the date of Employee’s
termination and Employee shall be deemed terminated by the Company during the
Protected Period other than for Cause. For purposes of this Agreement, the
“Protected Period” shall mean the period of time beginning with the Change of
Control and ending on the first anniversary of such Change of Control or
Employee’s death, if earlier.




(i) Disability. If, as a result of Employee’s incapacity due to physical
or mental illness, Employee shall have been absent from Employee’s duties
with the Company on a full-time basis for 150 consecutive calendar days,
and within 30 days after written Notice of Termination (as defined
hereinafter) Employee shall not have returned to the full-time
performance of Employee’s duties, the Company may terminate Employee’s
employment for “Disability”; provided, however, a termination of
Employee’s employment for Disability



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under this Agreement shall not alter or impair Employee’s rights as a
“disabled employee” under any of the Company’s employee benefit plans.




(ii) Cause. The Company may terminate Employee’s employment for Cause.
For the purposes of this Agreement, the Company shall have “Cause” to
terminate Employee’s employment hereunder only upon (A) the willful and
continued failure by Employee to perform substantially Employee’s duties
with the Company, other than any such failure resulting from Employee’s
incapacity due to physical or mental illness, which continues unabated
after a written demand for substantial performance is delivered to
Employee by the Board that specifically identifies the manner in which
the Board believes that Employee has not substantially performed
Employee’s duties or (B) Employee willfully engaging in gross misconduct
that is materially and demonstrably injurious to the Company. For
purposes of this paragraph, an act or failure to act on Employee’s part
shall be considered “willful” only if done or omitted to be done by
Employee otherwise than in good faith and without reasonable belief that
Employee’s action or omission was in the best interest of the Company.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the affirmative vote of
not less than three-quarters of the entire membership of the Board, at a
meeting of the Board called and held for such purpose (after reasonable
notice to Employee and an opportunity for Employee, together with
Employee’s counsel, to be heard before the Board), finding that in the
good faith opinion of the Board Employee was guilty of conduct set forth
in clauses (A) or (B) of this subsection (ii) and specifying the
particulars thereof in reasonable detail.




(iii) Good Reason. Employee may terminate Employee’s employment for Good
Reason. For purposes of this Agreement, “Good Reason” shall mean the
occurrence of any of the following without Employee’s express written
consent:




(A) an adverse change (as determined by Employee in good faith,
which determination shall be controlling for all purposes under
this Agreement) in Employee’s (i) positions, duties,
responsibilities or status with the Company from that in effect
immediately prior to the Change of Control, or (ii) reporting
responsibilities, titles or offices as in effect immediately prior
to the Change of Control; or any removal of Employee from, or any
failure to re-elect or appoint Employee to, any of such
responsibilities, titles, offices or positions, except in
connection with the termination of Employee’s employment for Cause
or Disability, or as a result of Employee’s death, or by Employee
for other than a Good Reason;




(B) a reduction in Employee’s annual rate of base salary as in
effect immediately prior to the Change of Control or as the same
may be increased from time to time thereafter (the “Base Salary”);




(C) a failure by the Company to continue the Company’s Annual
Incentive Compensation Plan as the same may be modified from time
to time, but substantially in the form in effect immediately prior
to the Change of Control (the “Bonus Plan”), or a failure by the
Company to continue Employee as a participant in the Bonus Plan



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in at least the same amount (the “Bonus Amount” ) as Employee’s
target bonus amount under the Bonus Plan with respect to the fiscal
year ending immediately prior to the Change of Control or with
respect to the current fiscal year if Employee has been employed by
the Company for a shorter period (Bonus Amounts related to less
than a full fiscal year shall be annualized for this purpose);




(D) the failure by the Company to continue in effect any other
employee benefit or compensation plan program or policy, in which
Employee is participating immediately prior to the Change of
Control, unless the Company establishes such new plans, programs or
policies as is necessary to provide Employee with substantially
comparable benefits; the taking of any action by the Company not
required by law that would adversely affect Employee’s
participation in or reduce Employee’s benefits under any of such
plans, programs or policies or deprive Employee of any material
fringe benefit enjoyed by Employee immediately prior to the Change
of Control;




(E) the Company’s requiring Employee to relocate to an office more
than 25 miles from the Company’s office to which Employee was
assigned immediately prior to the Change of Control, except for
required travel on the Company’s business to an extent
substantially consistent with Employee’s business travel
obligations immediately prior to the Change of Control;




(F) the amendment, modification or repeal of any provision of the
Company’s Certificate of Incorporation, as amended, or the Bylaws
of the Company which was in effect immediately prior to such Change
of Control, if such amendment, modification or repeal would
adversely effect Employee’s right to indemnification by the
Company;




(G) the failure of the Company to obtain the assumption of this
Agreement by any successor as contemplated in Section 6 hereof; or




(H) any purported termination of Employee’s employment that is not
effected pursuant to a Notice of Termination satisfying the
requirements of subparagraph (iv) below and, if applicable,
subparagraph (ii) above; and for purposes of this Agreement, no
such purported termination shall be effective.




Employee’s right to terminate employment for a Good Reason hereunder
shall not be affected by Employee’s incapacity due to a physical or
mental illness nor shall Employee’s continued employment following any
circumstance that constitutes a Good Reason hereunder, regardless of the
length of such continued employment, constitute a consent to or a waiver
of Employee’s rights hereunder with respect to such circumstance.




(iv) Notice of Termination. Any termination by the Company pursuant to
subparagraphs (i) or (ii) above, or by Employee pursuant to subparagraph
(iii) above, shall be communicated by written Notice of Termination to
the other party hereto. For purposes of this Agreement, a “Notice of
Termination” shall mean a notice that shall indicate the specific



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termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Employee’s employment under the provision so
indicated.




(v) Date of Termination. “Date of Termination” shall mean (A) if
Employee is terminated for Disability, 30 days after Notice of
Termination is given, provided that Employee shall not have returned to
the performance of Employee’s duties on a full-time basis during such
30-day period, (B) if Employee’s employment is terminated pursuant to
subparagraph (iii) above, the date specified in the Notice of
Termination, (C) with respect to a termination prior to a Change of
Control, which is deemed to be after such Change of Control as provided
in Section 3, the date of such termination, and (D) if Employee’s
employment is terminated for any other reason on or after a Change of
Control, the date of such termination.



     4.      Compensation During Disability or Upon Termination.




(i) If, during the Protected Period, Employee fails to perform Employee’s
normal duties as a result of incapacity due to physical or mental
illness, Employee shall continue during the period of such disability to
receive Employee’s full Base Salary and any awards, deferred and
nondeferred, payable during such period under the Bonus Plan, less any
amounts paid to Employee during such period of disability pursuant to the
Company’s short term disability or sick-leave program(s) until Employee’s
employment is terminated or such Disability ends. This Section 4(i)
shall not reduce or impair Employee’s rights to terminate employment for
a Good Reason as otherwise provided herein.




(ii) If, during the Protected Period, Employee’s employment shall be
terminated (x) by the Company for Cause, (y) by Employee’s death, or (z)
by Employee other than for a Good Reason, the Company shall pay
Employee’s earned but unpaid Base Salary through the Date of Termination
and the Company shall have no further obligations to Employee under this
Agreement.




(iii) If, during the Protected Period, (1) the Company shall terminate
Employee other than for Cause or Disability or (2) Employee shall
terminate Employee’s employment for a Good Reason, the Company shall pay
to Employee, by certified or bank cashier’s check or wire transfer within
five business days after the Date of Termination, an amount equal to: (A)
three times the sum of Employee’s Base Salary and Bonus Amount; plus (B)
that portion of Employee’s Base Salary earned, and vacation pay vested
for the prior year and accrued for the current year to the Date of
Termination, but not paid or used, and all other amounts previously
deferred by Employee or earned but not paid as of such date under all
Company bonus or pay plans or programs.




(iv) If any payment due under the terms of this Agreement is not timely
made or otherwise withheld by the Company, its successors or assigns,
interest shall accrue on such payment at the highest maximum legal rate
permissible under applicable law from the date such payment first became
due through the date of payment thereof.



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(v) In the event that any payment or benefit received or to be received
by Employee pursuant to the terms of this Agreement or any other plan,
arrangement or agreement with (A) the Company, (B) any Person whose
actions result in a “change in control” (for purposes of Section 280G of
the Internal Revenue Code (the “Code”)) or (C) any Person affiliated with
the Company or such Person) (all such payments and benefits being
hereinafter called “Total Payments”) would be subject to the excise tax
imposed under Section 280G of the Code, the Company shall pay to Employee
such additional amount (the “Gross-Up Payment”) such that the net amount
retained by Employee, after deduction of any excise tax imposed under
Section 4999 of the Code (the “Excise Tax”) on the Total Payments and all
federal, state and local taxes, including the Excise Tax, upon the
Gross-Up Payment, shall be equal to the Total Payments. For purposes of
determining the amount of the Gross-Up Payment, Employee shall be deemed
to pay federal income tax at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rate of taxation
in the state and locality of Employee’s residence on the date on which
the Gross-Up Payment is calculated for purposes of this subparagraph. In
the event that the Excise Tax is subsequently determined to be less than
the amount taken into account hereunder, Employee shall repay to the
Company, at the time that the amount of such reduction in Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment being repaid by
Employee to the extent that such repayment results in a reduction in
Excise Tax and/or a federal, state or local income tax deduction) plus
interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder (including
by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make
an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by Employee with respect to such
excess) at the time that the amount of such excess if finally determined.
Employee and the Company shall each reasonably cooperate with the other
in connection with any administrative or judicial proceedings concerning
the existence or amount of liability for Excise Tax with respect to the
Total Payments. The parties intend that the Gross-Up Payment be
determined in a manner that is most favorable to Employee.



     5.      No Mitigation or Offset. The provisions of this Agreement are not
intended to, nor shall they be construed to, require that Employee mitigate the
amount of any payment provided for in this Agreement by seeking or accepting
other employment, nor shall the amount of any payment provided for in this
Agreement be reduced by any compensation earned by Employee as the result of
employment by another employer or otherwise. Without limitation of the
foregoing, the Company’s obligations to make the payments to Employee required
under this Agreement shall not be affected by any set off, counterclaim,
recoupment, defense or other claim, right or action that the Company may have
against Employee.



     6.      Successors; Binding Agreement.




(i) The Company will require any successor, whether direct or indirect,
by purchase, merger, consolidation or otherwise, to all or substantially
all of the business and/or assets of



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the Company, by agreement in form and substance reasonably satisfactory
to Employee, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent as the Company would have been
required if no such succession had taken place. Failure of the Company
to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Employee
to payment from the Company in the same amount and on the same terms as
Employee would be entitled hereunder if Employee had terminated
Employee’s employment for Good Reason, except that for purposes of
implementing the foregoing, the date on which any such succession becomes
effective shall be deemed the Date of Termination. As used in this
Agreement, “Company” shall mean the Company as hereinbefore defined and
any successor to its business and/or assets as aforesaid that executes
and delivers the agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.




(ii) This Agreement shall inure to the benefit of and be enforceable by
Employee’s personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee
should die while any amounts would still be payable to Employee hereunder
if Employee had continued to live, all such amounts shall be paid in
accordance with the terms of this Agreement to Employee’s beneficiary as
filed with the Company pursuant to this Agreement or, if there be no such
designated beneficiary, to Employee’s estate.



     7.     Notice. All notices, consents, waivers, and other communications
required under this Agreement must be in writing and will be deemed to have
been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with confirmation of receipt), provided that a
copy is mailed by certified mail, return receipt requested, or (c) when
received by the addressee, if sent by a nationally recognized overnight
delivery service, in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):



     If to the Company:



	 
	Cyberonics, Inc.

	Vice President, Human Resources

	100 Cyberonics Boulevard

	Houston, TX 77058

	Facsimile No.: 281-228-7535








     If to Employee:



	 
	George E. Parker

	403 Allan Street

	Friendswood, Texas 77546








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     8.      Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by Employee and by the Chairman of the Board or an authorized
officer of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time.



     9.      Validity. The interpretation, construction and performance of this
Agreement shall be governed by and construed and enforced in accordance with
the laws of the State of Texas without regard to conflicts of laws principles.
The invalidity or unenforceability of any provisions of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, each of which shall remain in full force and effect.



     10.      Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.



     11.      Descriptive Headings. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.



     12.      Corporate Approval. This Agreement has been approved by the Board,
and has been duly executed and delivered by Employee and on behalf of the
Company by its duly authorized representative.



     13.      Disputes. The parties agree to resolve any claim or controversy
arising out of or relating to this Agreement by binding arbitration under the
Federal Arbitration Act before one arbitrator in the City of Houston, State of
Texas, administered by the American Arbitration Association under its
Commercial Arbitration Rules, and judgment on the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
Company shall reimburse Employee, on a current basis, for all legal fees and
expenses incurred by Employee in connection with any dispute arising under this
Agreement, including, without limitation, the fees and expenses of the
arbitrator, unless the arbitrator finds Employee brought such claim in bad
faith, in which event each party shall pay its own costs and expenses and
Employee shall repay to the Company any fees and expenses previously paid on
Employee’s behalf by the Company.



          The parties stipulate that the provisions hereof shall be a complete
defense to any suit, action, or proceeding instituted in any federal, state, or
local court or before any administrative tribunal with respect to any
controversy or dispute arising during the period of this Agreement and which is
arbitrable as herein set forth. The arbitration provisions hereof shall, with
respect to such controversy or dispute, survive the termination of this
Agreement.



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     IN WITNESS WHEREOF, the Company and Employee have executed this Agreement
in multiple counterparts effective for all purposes as of the Effective Date.

	 	 	 	 	 
	 	CYBERONICS, INC.

 	 
	 	By:  	/s/ ROBERT P. CUMMINS
 	 
	 	Name:  	 	Robert P. Cummins 	 
	 	Title:  	 	Chairman of the Board of
Directors and Chief Executive
Officer 	 
	 
	 	EMPLOYEE

 	 
	 	/s/ GEORGE E. PARKER
 	 
	 	George E. Parker 	 
	 	 	 
	 





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